Taking into account the fact that the illegal trade of cigarettes is rapidly increasing, the FBR is working on some sort of a solution including tax stamping. The raise in illicit trade has also resulted in decrease in revenue of the FBR. As per available data, around 40 percent of the cigarettes annually sold in Pakistan are illegal. This means that more than 30 billion illegal cigarettes are consumed every year which cause a loss of more than Rs 45 billion per year to the national exchequer.
Research shows that 85 percent of Pakistan's illicit cigarette problem is home-grown, meaning it stems from locally-manufactured tax-evaded (LTE) brands. These brands are priced as low as Rs 15-20, whereas according to the law, minimum tax payable per pack is around Rs 43; a clear testament to the tax evasion at hand. These brands are produced in factories located in Khyber Pakhtunkhwa and Azad Jammu and Kashmir, where the manufacturers only declare a portion of the actual quantum of cigarettes produced; thereby paying a negligible portion of their tax liability. Despite accounting for nearly a quarter of the market, the illicit sector's tax contribution makes up less than two percent of the total tax revenues from the cigarette industry. It is no surprise then that the LTE cigarettes cost the national exchequer around Rs 47 billion every year.
While the government has been deliberating on whether to use tax stamps or T&T to check evasion, the existing law ie (Supply and Distribution of Stamp Rules, 1954) gives the Pakistan Security Printing Corporation (PSPC) the sole authority to print tax stamps. Tax stamps are thus treated as government paper and their counterfeiting becomes a criminal offence.
Experts were of the view that the tax stamps would work through the reconciliation of the inventory of tax stamp purchased by the manufacturer. Any packet sold in the market without tax stamp or with a counterfeit tax stamp should be seized and its buyer or seller penalised, with counterfeiting carrying much higher penalties. With the proposed system in place, if LTE manufacturers were to continue to under-declare their production, it would be very easy for enforcement officials to identify packets without the requisite tax stamp in place and consequently hold the manufacturer's liable for tax evasion, they claimed.
According to sources, the government is also considering track and trace system to check evasion in tobacco sector. The tax department principally agrees to the idea of tax stamps, whereas other option included hiring third-party or foreign company or outsourcing any company for printing tax stamps or introducing track and trace systems.
At the same time, the FBR should immediately check that which manufacturers are evading taxes in such massive quantities and they should be penalised. If policymakers opt for tax stamping, it will be joining the ranks of the Bangladesh, Ukraine and Russia which are also using tax stamps to plug the local evasion in the cigarette sector.
The implementation of said solution would not only increase tax collection from the cigarette industry, but would also serve as visual proof of tax payment on all packs; a crucial pre-requisite for enforcement efforts in the country and consequent deterrence. By choosing tax stamps, the government would also be creating a source of revenue for its own self ie PSPC, which is the most reliable and is already involved in printing stamps, etc. It can perform the said task adequately and effectively, they opined.
Copyright Business Recorder, 2017